Kiri Industries Limited (532967) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I'm Bharti, moderator for the conference call. We welcome you all to Q1 FY '22 Conference Call of Kiri Industries Limited, hosted by Aditya Birla Money. This conference call may contain forward-looking statements about the company, which are based on the belief, opinion and expectation of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is recorded. Sudeep Shah of Aditya Birla Money. Thank you, and over to you, sir.

Thank you, Bharti, and good afternoon, everyone. On behalf of Aditya Birla Money Limited, we welcome you all to Q1 FY '22 Earnings Conference Call of Kiri Industries Limited. From the management side, we have Mr. Manish Kiri, Managing Director; Mr. Jayesh Hirani, Senior Manager, Accounts and Finance; and Mr. Suresh Gondalia, Company Secretary. So without much delay, I now hand over the floor to the management for opening remarks, followed by the interactive Q&A session. Thank you, and over to you, sir.

Thank you. Good afternoon, everybody. It's a pleasure to welcome you to the earnings conference call for the first quarter of financial year 2022. I hope everyone is keeping safe, well and getting vaccinated. As you already know, that most businesses were impacted in the first quarter due to the second wave of COVID-19 pandemic and lockdown restrictions enforced subsequently. And unfortunately, Kiri's financial performance in quarter 1 FY '22 was also impacted for the same reason. For QY (sic) [ Q1 ] FY '22, the company achieved a consolidated turnover of INR 293 crores, which was 169% higher year-on-year basis, but down by 19% on a quarter-on-quarter basis. The EBITDA reported for the quarter was 6.86%, and the net profit was INR 6.8 crores. The consolidated total comprehensive income was up by 257% year-on-year as this also includes the share of profit of DyStar, which is associated company of Kiri, amounting to approximately INR 84 crores, and INR 16 crores from Longsheng Kiri, which is a joint venture, which is consolidated with Kiri's financials. Kiri's standalone turnover during quarter 1 FY '22 was approximately INR 200 crores, which was 191% higher on a year-on-year basis and lower by 27.5% on a quarter-on-quarter basis. The EBITDA during Q1 FY '22 was negative INR 3.29 crores on a standalone basis as compared to positive EBITDA of INR 26.4 crores in quarter 4 FY '21, and negative EBITDA of INR 20.23 crores during quarter 1 FY '21, last year same quarter. The uncertainties of business operations under partial lockdowns across India and also in certain affected countries globally in second wave during quarter 1 FY '22 showed sharp and sudden increase in the basic chemicals and raw material prices. In short term, because of the contractual obligations of running order book as well as because of the market prices not going up, the passover of increased cost to customers was not fully possible. The current quarter's margins have been eroded mostly due to these reasons in raw material costs, which could not be passed on to the customers. Another important factor which is affecting this quarter is the ongoing high legal costs on account of litigation in Singapore cost against Senda for the valuation of DyStar and buyout of stake of Kiri by Senda and also Kiri's claim against DyStar for not treating Kiri as its preferred supplier impacted financial results. So legal cost on one side and raw material increases on the other side, these 2 are the major factors affected this quarter. During quarter 1 FY '22, receivables increased as a result of a partial lockdown. Inventory levels climbed to some extent as did payables, which are projected to normalize in the future quarters as COVID-19 impact fades. Coming to Kiri's minority operations suit. As you may have already known by now that the Singapore International Commercial Court has awarded a final valuation of $481.6 million for Kiri's 37.57% stake in DyStar. Both Kiri and Senda have filed appeals against SICC order, which are dated 21st December and -- 21 December 2020 and 21 June 2021 with Court of Appeals with the Supreme Court of Singapore. And Kiri also has filed another appeal against an SICC order that dated 17th March 2021. Hearing dates in the Supreme Court are awaited. And in case of Kiri's claim, against DyStar, both the parties have also filed their closing submissions in this quarter as well as cost submissions also filed in this quarter. And now the order from SICC is awaited at any time. Lastly, coming to future outlook. As you may be already aware that the Indian chemical sector is on the cusp of very high growth trajectory in the coming years, Kiri's entire product range of dye specialty intermediates -- dye specialty intermediates, dye intermediates and other value-added specialty chemicals is posed to provide impetus to its order books for the exports and in the domestic market in second half of financial year 2022. It is important to highlight that the specialty intermediates plant, the first phase which has been operational since this last quarter will be one of the main growth drivers which shall also enhance volumes and margins of the company in the near future. I would like to now open the floor for questions. Thank you.

[Operator Instructions] First question comes from [ Nandan Ambit ], an individual investor.

Hello? Yes. Congratulations on the results. My one question -- only one question is with respect to the accrual of the associate share of profits. So in the presentation, which has been shared on the results, there is a -- it is mentioned that the profit on account of associates has been accounted only to comply with respect to the accounting standards. So I wanted to understand the profits, which the DyStar will earn or has earned after the set of date -- of the value date, will they be received by Kiri or how will it be accounted?

So this is a very important point. And whatever profits DyStar has been making since July 2018, Kiri has not been privy to the excess of that profit because the valuation date was 3 July 2018. And Kiri had requested for the interest to be paid to Kiri, if not profit, because the transaction date on which the actual transaction of buyout would take place would be far away from the valuation date. Court didn't award interest to Kiri for this time frame. And that's the reason that we have filed appeal in the Supreme Court. And Supreme Court would look into the matter whether Kiri can be awarded interest at least from the date of the valuation date until the transaction takes place. So it's in the court right now, and let us see what Supreme Court decides once the hearing takes place.

Next question, [ Vishal Jajoo ], an individual investor.

Manish, my first question was from -- to understand, sir, better our industry. Are basic sales of reactive dyes and all, whether they come from directly in terms of dyes to industry? And if yes, then, sir, in this quarter, our domestic sales of overall textile dye segment has seen a massive revenue growth because the export sales have been increased. While our revenue of export market has increased, however, domestic market has remained sluggish. I know there was an impact of COVID, but post-COVID, why was -- we have seen such a revenue drop in domestic market as far as with respect to export market where we are gaining -- increasing the revenue share, but not in domestic market?

Right. See, this is the quarter in which the dye sales as well as intermediates sales both got impacted and main impact came from domestic market. Domestic textile market was almost on a standstill for a few months. And the sales, consumption, everything was on a standstill mode. Extremely low level of activities and extremely low level of sales took place, especially in 2 months, April and May. June partially started recovering. July turned out to be better than expected. But if you look at the entire quarter, the main impact, as you rightly said, came because of the dip in the domestic business. However, export has also got impact, right?

Yes. Yes.

And export of dyes also was lesser. Just to give you a little more insight, the exports of reactive dyes from India takes place through various countries, but the largest countries to which the exports happen are to Turkey and Bangladesh. 50% of -- almost 40% to 50% of India's exports of dyes go to these 2 countries. And both the countries went through the lockdowns in this quarter. Turkey was having lockdown for almost 20, 25 days. And the same situation was there in Bangladesh, too. So export was impacted, but relatively lesser impact in export and higher impact in domestic market. While on the other side, the raw material prices and the raw material situation continue to remain higher. In fact, this quarter, the raw materials increased significantly. Prices of aniline, prices of sulfur, prices of naphthalene, a host of basic chemicals and raw materials, in fact, increased in prices. So on one hand, lower demand and not being able to increase the finished product prices, while we ended up paying higher prices on the cost of raw materials. So that is how the overall industry situation prevailed in this quarter.

So sir, is there any specific reason? Because this current quarter has seen many of the textile dyes manufacturing company, they have shown rapid sales due to increase in exports, which Indian textile sector is thinking of. So are we facing the competition of increasing raw material prices or there is a China competition effect which we are seeing due to this standstill -- April month was sluggish. The overall sales of the textile segment is going up in dye. So are you facing some of the raw material issues front or we are facing issue in terms of China competition?

In this quarter, April to June quarter, textile sales, I think, has not increased, number one. Number two, overall dye exports has reduced, right?

Okay. Okay.

For example, in month of May, India usually exports somewhere around 16,000 to 18,000 tonnes of dyes, correct? Now April, May -- especially month of May, it was only 12,000 tonnes. I'm talking about India's overall exports, okay? Similar situation was in June, too, right? So June, India exports of reactive dyes reduced by another 3,000 to 4,000 tonnes, correct? So overall, the country's exports of dyes in this quarter was also down by, like, 25%, 30%. It's not, like, Kiri is a unique case who's export reduced and other competitors export increased. India's overall exports also reduced in this quarter.

Yes, yes. So sir, have you seen any some settling in this quarter? Have you seen any uptick in, like, the June month end is coming to start in July?

This month, from July onwards, things have started recovering. Exports also is resuming back slowly. Domestic market has opened up. Domestic textile units have started consuming dyes also. Their activities have increased. So this quarter would be much, much better quarter compared to last quarter. So -- so we are expecting at least 30% increase of business in this quarter compared to last quarter.

Okay. That's good. That's good, sir. And sir, on raw material front, as you said, the prices of aniline have been rising sharply in this quarter. So are you expecting this to be cool-off? And eventually, we were also -- have easy approval for aniline, so is management thinking for backward integration of all these other segments and also start manufacturing certain of the raw materials which we are facing issues currently?

Just to answer your first question regarding the price movements of aniline. By end of last year, right, and to some extent, the fourth quarter of last financial year, aniline prices started rising from around INR 55 to INR 60. And in April to June quarter, it went as high as INR 210, okay? It tapered down. And right now, it's INR 140 to INR 150, depending on domestic or import, correct? So still, if you consider INR 60 of original price...

It's still double, more than double.

And now the price is more than doubled today, okay? So -- and these prices are continuing. This quarter, we forecast that it would not come down much. But on the other hand, dyes prices and intermediate prices might go up and we might be able to pass on the pricing in the finished products, okay? So that's the price fluctuation related to aniline. Aniline and related products definitely is the project which was under evaluation. Company seriously thinking about it, which involves a large investment. The company also has environment clearances in place. And once the funds availability is there, we will consider this as one of the prospective projects. But yes, that's one of the projects that is under evaluation.

And sir, is there any expectation regarding the DyStar event. Like, when can we expect the fund to be disbursed, still -- by the end of March 2022?

Expecting so because now Supreme Court process is ongoing. Supreme Court filings are also taking place. And we would have more clarity in the next case management conference, which will be the case management conference of Supreme Court. We are expecting probably by November -- December is a vacation month. Or latest by January, we must have Supreme Court final hearing. So once that hearing date is known, we would know the definitive time lines for closing of the legal case in Supreme Court and thereby, the execution of buyout orders.

Okay. And sir, one last final question. Sir, I would just like to know, if we plan out any expansion, then what are you planning? Are you also planning for that or we will be just plan for expansion only from the funds we received from DyStar? So are we also planning for increased -- taking the debt and expanding the other business segment, which we were discussing since last 2 to 3 quarters. So what we are targeting to implement those new business plans or I must say the new segment with where we are driving them? So will this be from DyStar fund? Or we are also planning to kickstart it early by taking to debt? And if the fund comes up, then we can pay off the debt at a future time. And at least we can have a start of the business as of now. So it means 1 to 2 years down the line? So what's your view on that?

Number one, it would be -- for the future projects and future expansions, it would definitely be equity and debt ratio both, right? We have only equity. Kiri's Board has also deliberated on this point. And we would have adequate debt and adequate equity. And that is how we would be able to increase return on equity for the future expansions and new projects that the company would be investing in, right? So it will be both adequate ratio. That's number one. Number two, we would not raise debt first. And then -- like a bridge loan and then pay back. That's not the plan, sir. Because the projects are large, risks involved are more. And we would be optimizing our risk to start those large projects, sizable projects once we have definitive clarity on the Singapore funds, which would be used as equity. So we will -- we would wait until we have those funds available. But parallelly, company would or might also tie up debt. So debt can be tied up. Financials can be -- financial closure can be reached. But actual availment of borrowing would only take place once we start implementing project, once we have debt equity all secured. We would not -- project and then than halfway, we get stuck in a limbo. We will have absolute clarity when we start, when we are going to end, how we are going to execute, and we will have tight time lines to execute the project. So we would do both at a time and not earlier debt.

Okay. That's great to hear. That's a great clarification. So I guess we must expect the confirmation then we will be expanding in the December quarter when we have the Singaporeans hearing as well. At that time, I guess, management would be fully focused on -- there will be the next project lines we will be focusing, right?

Yes.

[Operator Instructions] Next question comes from [ Abhishek ], an individual investor.

I have a few questions. Hello?

Yes, please. Yes, Abhishek.

The first question is on the first participant question. The amount what we are considering in our balance sheet from DyStar, like you have shown in Q1 some INR 83 crores. So when the court has given the orders that interest would not be payable, and we would not be entitled for the profit also after 2018, had it not been prudent to not consider this amount?

Well, as Kiri continue to be a shareholder, and please understand, Court has not said that you would not be entitled for the profit, let me just clarify, right? Today, DyStar, if wishes, and the DyStar Board, can still do dividend, right? Whatever earnings which is happening, Kiri's stake continues to be there and to the proportioned to Kiri's stake, that profit technically belongs to Kiri, right, till the buyout transaction takes place, okay? Now valuation is dated on 3rd July 2018. And that valuation, when was determined, must have also considered the projections of the company, isn't it? So whenever the -- whenever the valuers submitted value and court arrived to a number on that particular date of valuation, it also considered how DyStar would be performing in future correct? Now definitely, we strongly believe that Kiri should get something because post-valuation date until transaction date. And let us say, in a worst-case scenario, transaction is not taking place, correct? So Kiri cannot stop its consolidation its share of profit, which belongs to Kiri till the day the buyout is actually executed.

No, sir. I have a different mind. What I'm saying is you are saying that the when the valuation was decided, they would have taken the future cash flow into consideration and arrive on the value. So that comprises -- the value comprises of the projection, what you are showing -- what we are showing now, right? So when the actual value will be given to us, then this cash flow, whatever we are showing now, will not accrue to us. And in case bank does not -- in case the court is not entitle us for the interest, then all this will be taken off from...

So that is the reason that this disclosure is there.

So how much we have included as of now in our balance sheet or profit, this profit approval from the DyStar?

See, DyStar accrual, you would see from our financials, and you will report our quarterly results, right? And as those numbers are already there, post-July 2003 numbers are there and before are also there. So that -- those numbers are there.

Okay. So whenever that valuation also, say, $500 million will arrive. So we will deduct the amount what we have already considered in our balance sheet, and the remaining amount will be shown, right?

No, no. The accounting would not work like that. We would continue to consolidate. We have to write that, really, until buyout takes place. And on the buyout, it would be against the original investment of Kiri. For example, 2010, Kiri invested close to INR 100 crores. And this would be accounted as a capital gain on sale of shares, right? Whatever Kiri accrued accounted for until that date would remain in the balance sheet of Kiri, isn't it?

No, this point is correct sir, say $500 million, and we had got, I don't know the exact figure, say $100 million of DyStar. So $400 million is the amount -- the capital gain.

More precisely INR 100 crores, it was about INR 100 crores, and this would be coming INR 3,600 crores. That's the delta.

Correct. So this amount, what we are showing, like INR 83 crores we have shown, this amount is not coming to us. This amount, what you are taking is also...

See, coming to us, what you are mentioning is in the form of liquidity, isn't it?

Yes, correct. Correct. Correct.

You are referring to liquidity, right? So accounting is not done on the basis of liquidity, isn't it? Liquidity is a subject to the decision to the Board. Your accrued profit is yours, that comes to you as a liquidity. For example, tomorrow when Supreme Court examine the whole issue and Supreme Court realizes that DyStar continued to make profits in all of these 3 years, where Kiri, as a minority shareholder, has been oppressed and has been deprived of earnings for 3.5 years, correct? So it's up to the court to recognize the fact that Kiri's 3 years with the date from the valuation and the date of transaction, Kiri has accrued this kind of money, but not paid to Kiri because of dividend not given to Kiri. So Kiri has been deprived of liquidity. And that liquidity, not giving Kiri to -- not giving that liquidity to Kiri is also part of the continuing minority operation. That's what Kiri has claimed, isn't it?

Yes, sir. Absolutely.

But it is up to court to do a justice here because it is possible that there is no precedence in the courts where your valuation date and your transaction date, both the dates are too far from each other. So it's also a test case for Singapore Supreme Court to decide. But do we conclude that this profit is not belonging to Kiri, even if Kiri continue to shareholder? Is it right to do it? I don't think so.

No, sir, what I am saying is since this money is not at all coming. So we should have parked this figure somewhere else, not in the profit and loss statement actually?

Where you can park? Which other place you park it?

Very frank, I am not an accounting expert. So maybe a long-term asset we should have shown.

I don't think so. The -- whatever accounting has been done has been done prudently, wherever it has to be shown, wherever it has to be parked, and company has no -- I mean, no, you -- company has no intent to misrepresent anything to you. Let me clarify that. Whatever has been accounted for is true and correct. Whatever has been disclosed is also true and incorrect. Whatever to belongs to Kiri is also true and correct.

[Operator Instructions] Next question comes from [ Suyash Saraogi ] from [ First Capital Markets ].

Hello?

Yes, please.

Sir, my question, what is the quantum of the legal expense that we have incurred in this quarter?

Well, let me give you that number. If we had not incurred legal expense in this quarter, our EBITDA would have been 4.5%. So that means that our legal expense is north of INR 12 crores.

North of INR 12 crores. And until -- this run rate will be there for the next 3 quarters for this year because we expect the money to come by March of -- March 2022?

Yes. At least until Supreme Court work is going on, the expenses are going to continue. And you are right. I'm sure until December, it would continue. But if hearing comes earlier in November, then last quarter, it would go down. But if hearing extends to January, then we would see also legal expenses with a similar level in the last quarter 2. So this year, on a safer side, we can say that we will have to incur these expenses.

Okay. And any idea on the date for hearing for Supreme Court? By when can we expect to get a date?

I think we should have clarity in our next case management conference. So case management conference from Supreme Court is expected to take place, based on our lawyer's advice, in this month, in August. So by August, we should know. And the moment we learn the date of Supreme Court hearing, it would be just 1-day hearing. We will immediately announce. But looking at the activities currently, I can tell you that earliest it would be November based on the current status and the latest, it would be January because December is the closing months looking at the other submissions' time lines.

Okay. And sir, last con call you had said that we would be enforcing the order in the meantime, the order that we got from SICC. So are we taking some concrete steps for that?

Yes, yes. The steps are already ongoing as we speak. So the enforcement actions are already going on. Until now, Senda has not got a stay by the way, okay? And stay is not there on the SICC order. So we are following up, lawyers are sending the necessary legal notices, and that enforcement is already on.

So we can expect -- if we ask the court for enforcement, then can we expect money to come in before the Supreme Court hears the matter?

We -- the -- because Kiri also gone in appeal, right?

Yes.

So the issue here, which is that both the parties are in appeal. And that may change the approach to a little bit on the soft side. You understand what I mean? Because...

Right, right. We've also taken a stance towards the appeal of the earlier order so the court may not inclined to...

Right. We've also taken a stand that we don't accept INR 481 crores, right? According to Kiri, maybe it's INR 700 crores, INR 800 crores, whatever it comes to, right?

Are we also being reimbursed for legal costs that have been incurred in the past?